Some chains demand more experience—and more cash—from buyers

Journal Reports

With the economy in the dumps, an array of franchisers are raising their standards for prospective buyers. They're demanding candidates bring much more cash to the table, as well as a stronger track record of experience in the industry. In some cases, they're even inspecting the buyers' current operations to see just how well they're run.

Tactics for Tough Times

"The margin for error in a down economy is less," says
Darrell Johnson,
chief executive of franchise research-and-consulting firm FRANdata in Arlington, Va. "In a good economy, when you are struggling and learning on the job there is more margin for error because the economy is helping you along."

ENLARGE

Popeyes

POPEYES SAYS...

Buyers must already own a restaurant

...AND IT CHECKS OUT

Cleanliness

Operations

Financial statements

Consider the moves at Popeyes, the fast-food chain operated by
AFC Enterprises
Inc.
In late 2007, Popeyes began to feel "a mushiness in the market," triggered by the housing crisis, recalls Vice President of Development
Greg Vojnovic.

Candidates with stronger business acumen could better handle a bad economy, the company figured—so it mandated that all potential franchisees, or their business partners, must already own a restaurant.

"We're looking for those that have experience…sweating about payroll and paying taxes every month," Mr. Vojnovic says. As part of the evaluation process, Popeyes visits the existing establishment to evaluate its cleanliness, operations, culture and financial statements.

The strategy has paid off. Popeyes restaurants that opened in 2008 and 2009 generally have better sales than those that opened earlier, according to Mr. Vojnovic. Also, he says, lenders are more comfortable financing new Popeyes locations because of its improved track record.

Following the Money

ENLARGE

Zoup Fresh Soup's managing partner and founder, Eric Ersher
Zoup!

ZOUP WANTS BUYERS WITH:

$150k in cash

$350k net worth

Credit score over 700

Indeed, banks are a big reason some franchisers are raising the bar. Since the credit crunch hit, banks have been turning down loans left and right—and if a potential buyer can't get financing, it means big headaches all around.

Would-be buyers lose the time and money that they spent going through the application process. And franchisers—which give franchisees a set window of time in which to find financing, hire employees and open shop—must sometimes wait as long as six months to a year to take back the area and make it available to new candidates.

So, franchisers want candidates to look as attractive to banks as possible. And for banks looking at franchisee loans these days, "[personal] financials are of much greater importance," says Mr. Johnson. "And most lenders are requiring industry experience."

A Pot of Cash

For instance, the sandwich chain Firehouse Subs used to encourage a 30% down payment out of the buyer's pocket, but some candidates could get away with 10% or 20% before the recession. Now it's requiring 30%—roughly $80,000 to $90,000—because banks won't stand for anything less.

ENLARGE

Firehouse Subs

LOOKING TO BUY INTO FIREHOUSE?

30% down payment

The results have been positive, says
Don Fox,
chief executive of Firehouse of America LLC, headquartered in Jacksonville, Fla. The quality of the applicants is higher than it's ever been in the 12 years the company has franchised, and stores that opened this year are pulling in sales that are 17% higher than those that opened earlier.

At Zoup Fresh Soup Co., candidates now must have $150,000 in cash, $350,000 in net worth and a credit score greater than 700. Previously, they needed only $100,000 in cash and $300,000 in net worth to open a store, which costs between $250,000 and $400,000.

"The credit score and assets seem to be in line with the requirements of the financiers," explains
Eric Ersher,
managing partner and founder of the 26-store eatery, headquartered in Southfield, Mich. "We do not look at applications if they don't meet the financial requirements."

The new owners must also now be hands-on and present at the business. That disqualifies candidates who have another business or a day job. "The downturn highlighted the importance of fitting with the culture," says Mr. Ersher. "Those stores that had either absentee or not-engaged owners have not fared as well as those that continue to be passionate leaders."

Ms. Maltby is a staff reporter in The Wall Street Journal's New York bureau. She can be reached at emily.maltby@wsj.com.

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